Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2006

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2006

April 11, 2018

And the saga continues . . .

In Smith v. Molly Maid, Inc., 415 F. Supp. 2d 905 (N.D. Ill. 2006), a prospective Molly Maid franchisee (“plaintiff”) brought suit against the Molly Maid, Inc. franchisor (“defendant”) alleging, among other things, violation of the Illinois Franchise Disclosure Act and breach of the Franchise Agreement. In 2001, plaintiff telephoned defendant to inquire about the franchise opportunities it offered. During the course of conversations between the parties, plaintiff made several misrepresentations in order to better her chances of becoming a franchisee. Defendant later sent plaintiff a Uniform Offering Circular, indicating plaintiff would be required to pay: “(a) a fixed Franchise Fee of $6,900; (b) a fixed Initial Package Fee of $8,000; and (c) a Territory Fee of $1.00 for every qualified household, typically from $15,000 to $60,000.”

 

After intermittent conversations over the next couple of months, defendant approved plaintiff as a Molly Maid franchisee based on the false information that plaintiff submitted to defendant. Defendant later sent plaintiff a congratulatory letter, enclosing two copies of a franchise agreement (“agreement”), and informing plaintiff that the agreement would become effective on the date that defendant signed it.

 

Plaintiff signed both copies of the agreement and returned them to defendant, along with a $6,900 check for the franchise fee. Defendant then instructed plaintiff that defendant would sign the agreement once plaintiff completed the required training. Because plaintiff never completed the required training, however, defendant never signed the agreement. Accordingly, defendant subsequently sent plaintiff a letter refunding the initial $6,900 fee.

 

The Illinois Franchise Disclosure Act provides:

 

(1) “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(a) a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and

(b) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and

(c) the person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of $500 or more.

 

815 Ill. Comp. Stat. 705/3(1). In order to establish that the parties entered into a franchise agreement, the court stated that plaintiff must prove, among other things, that plaintiff paid a “franchise fee exceeding $500 for the right to enter into the business.” Although plaintiff paid $6,900—an amount far exceeding $500—this amount was paid “towards the franchise fee, [but] the entire fee required for the right to enter into the business was $43,351.” Because plaintiff only paid part of the amount required to enter into the business, and not all of it, the court determined that the franchise fee element was not satisfied.

 

Takeaway: Payments towards the franchise fee, but equaling less than the full amount required for the right to enter into the business, have not been found to satisfy the franchise fee element of the Illinois Franchise Disclosure Act.

 

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